In the past year, central banks around the world have been weighing the risks of high inflation rates and the possibility of economic recession. Now, central bank decision-makers may need to consider a new dynamic factor: turbulent financial markets.
The initial reaction of central bank decision-makers around the world to the stock market crash on Black Monday shows that officials were not too scared - the Reserve Bank of Australia maintained interest rates at a 12 year high on Tuesday and refused to cut rates in the coming months; San Francisco Federal Reserve Chairman Daly only stated on Monday that he would cut interest rates in the "next few quarters" and pointed out that the market may be overly moving in one direction; Although the Bank of Japan, Ministry of Finance, and financial regulatory agencies held a meeting on Tuesday to discuss market issues, the general view that the Japanese economy is recovering has not changed.
It seems that they were also boosted by the calm attitude shown by these central bankers. On Tuesday, stock markets from Tokyo to New York experienced varying degrees of rebound.
However, some market traders are still reminding investors not to conclude that the turbulence has ended.
The global strategist of Brown Brothers Harriman Company stated that until more accurate data shows that the United States is not in recession, "due to fear dominating, volatility in all markets is expected to intensify.
The recent situation has actually shown that the tightening of financial conditions will create new constraints on economic growth. The decline in inflation rate already means that the actual impact of high interest rates by the central bank is increasing. Currently, high market volatility may prompt the central bank to take greater or more frequent easing measures before the end of the year.
In fact, according to Bank of America's statistics, in the three months ending at the end of July, central banks around the world have cumulatively cut interest rates up to 35 times, the highest number since the beginning of the pandemic in 2020. In the past 25 years, the most frequent rate cuts by global central banks in a three-month rolling cycle was as of May 2020, when central banks around the world cut interest rates a total of 92 times in three months. By contrast, during the height of the 2009 financial crisis, global central banks implemented a total of 76 interest rate cuts in the three months ending in April of that year.
It can be foreseen that this number (35 interest rate cuts) is likely to climb further in the coming months.
James Knightley, Chief International Economist at ING Financial Markets, stated that although current information still suggests a soft landing is possible. But in order to achieve a soft landing, central banks around the world (not just the Federal Reserve) will need to adjust policy rates to a more neutral level faster than they previously suggested& amp;quot;
Background report from Caixin News Agency: One article interpretation: Where have major central banks around the world reached in cutting interest rates? Who else hasn't taken action?
One of the triggers for this stock market crash is the weaker than expected July non farm payroll report in the United States, especially the unemployment rate triggering the "Sam's Rule" threshold that foreshadows an economic recession. This has led people to believe that the failure of Federal Reserve Chairman Powell and his colleagues to lower interest rates at the meeting on July 30-31 was a mistake.
Although broader data shows that almost no one is worried about a credit crunch right now. The Federal Reserve's survey on Monday showed that the number of banks tightening loan standards in the previous quarter decreased, while demand for commercial and industrial loans no longer deteriorated. However, the sustained downturn of any risky asset could weaken the recruitment desire of companies and the sustained consumption willingness of consumers, thereby increasing the risk of economic recession - in the past three weeks, the global stock market value has shrunk by about $6.4 trillion at one point.
Robert Sockin, Senior Global Economist at Citigroup, stated that the narrative of weak economic activity and recession concerns may self reinforce.
Data from the interest rate futures market shows that although the expectation of a significant interest rate cut by the Federal Reserve has slightly cooled down among market traders on Tuesday, it is still expected that the Fed will cut interest rates by at least 100 basis points before the end of the year. Investors have also increased their bets on interest rate cuts by the Bank of England and the European Central Bank, both of which have already cut interest rates earlier this year.
Note: The green and red lines represent the expected interest rate cuts for 2024 and 2025. It can be seen that on August 6th, the expected interest rate cuts for the year were reduced by nearly 40 basis points
Rob Subbaraman, head of global market research at Nomura, worked at Lehman Brothers during the 2008 financial crisis. He stated that factors such as slowing economic growth, still high interest rates, expensive market valuations, and sudden emotional fluctuations are intertwined, creating an environment where 'anything can collapse'.
He warned, "In this environment, default issues may begin to become more severe, which could have a ripple effect on the economy. We haven't encountered this yet. But I think this environment is becoming increasingly mature, and we may start to see pressure on the financial system
It is worth mentioning that the current cycle has actually witnessed catastrophic accidents driven by the market. For example, people can easily evoke memories of March 2023, when some regional banks in the United States collapsed under the pressure of rising borrowing costs, triggering a broader crisis of trust worldwide and ultimately dragging down the century old Swiss bank Credit Suisse